Just 11% of derivatives users from across the private equity, real estate and infrastructure sectors believe that their Libor-referencing contracts contain provisions that are appropriate for the benchmark’s permanent discontinuation, according to a survey from JCRA, an independent financial risk advisory, at an event it hosted alongside global law firm, Norton Rose Fulbright. The firm says that 85% of the attending derivatives users had Libor-referencing contracts with termination dates beyond the end of 2021.
The survey1also found that 49% of respondents think their contracts do not incorporate appropriate fallback language and 40% said they didn’t know. It also revealed that 38% of respondents described their progress in renegotiating contracts to accommodate Libor’s discontinuation as ‘not having started’, while 26% said it was a ‘work in progress’ and 23% have not yet identified which contracts require amendment. No respondents at the event had completed their renegotiations.
When asked whose responsibility it was to identify contracts that may be impacted by Libor’s discontinuation, over half (58%) thought it lay with both the lender and the borrower, while 31% believed it was the lender’s sole responsibility, and just 8% said it was the borrower’s.
“The research highlights the scale of the renegotiation of contracts required in the near future,” says Joshua Roberts, JCRA’s lead adviser on benchmark reform. “There is a danger that this will give rise to a significant capacity problem as the 2021 deadline approaches. Firms will want to ensure that they have taken appropriate advice to understand the options that are available when amending contractual arrangements.
“We would suggest that, as the clocks ticks down, firms that do not know whether they have contracts referencing Libor should carry out a full review to identify their exposure,” he continues. “It is concerning to see how few renegotiations have actually taken place; firms should do this in a way that at the very least minimises value transfer. We recommend that firms should look to benchmark the renegotiation to minimise their risk and fully understand any value transfer that could occur.”
Davide Barzilai, Partner at Norton Rose Fulbright, adds, “The direct link between significant parts of the debt and derivative markets means that a smooth transition for the legacy book is all the more important. Having advisers on board who understand the issues across different markets and jurisdictions will make this transition much easier. With a thorough understanding of institutional structures and the available technology, projects are much more likely to be successful.”